Pensions Bulletin 2019/40

GMP equalisation – Guy Opperman calls for action

Schemes must act now to equalise GMPs, according to Guy Opperman, the pensions minister. Citing the fact that six months have now passed since the DWP issued its guidance on GMP conversion (see Pensions Bulletin 2019/16), Mr Opperman is reported as saying that companies should be taking steps towards equalisation such as correcting records and deciding upon a preferred methodology.

Comment

This is all very well, but the DWP guidance was concerned only with a solution using the conversion legislation, and the DWP has acknowledged that this legislation needs some adjustments made to it to clarify and resolve certain matters. So, it is disappointing to see that the Pensions Bill that Mr Opperman is championing is silent on this issue.

Pension schemes and scheme sponsors are also waiting to hear from HMRC on how the complex pension tax law impacts on equalisation solutions – whether through GMP conversion or dual record-keeping. Although Mr Opperman is right in signalling that some steps can be taken now by schemes and their sponsors, much more is needed from Government in order that this equalisation journey can make good progress.

ACA reveals employer concerns over GMP equalisation

The Association of Consulting Actuaries has revealed, as part of its 2019 pension trends survey, widespread indecision and worries of employers over the complexity and cost of GMP equalisation.

Key findings include:

• 64% of employers running DB schemes say it will take more than two years to fully equalise pensions for the effect of unequal GMPs in their schemes
• 43% of these employers say they are likely to opt for GMP conversion, with 31% leaning towards the year on year calculations and dual records and the remainder undecided; and
• Administrative complexity and time plus the cost of the exercise were the two top ranking challenges that employers felt they were facing on GMP equalisation

The ACA has used the survey results to once more call on Government to support DB simplification measures that can build on potential simplifications that can arise through using the conversion route to address the GMP inequality issue.

Comment

There are no easy solutions to the GMP equalisation challenge – with data, or the lack thereof, being at its heart. It is therefore surprising that employers appear to see “missing/poor data” as one of the less significant challenges. We look forward to the promised guidance on data issues from the GMP equalisation working group soon.

General levy to go through the roof?

The largest ever increases in the general levy are threatened in a consultation launched by the DWP on 18 October. Such increases are due to the building up of a cumulative deficit of over £16m in 2019 (from a cumulative surplus of £24m in 2013) which is estimated to grow to over £50m by April 2020.

The general levy, paid by occupational pension schemes and personal pension scheme providers, is used to fund the core activities of the Pensions Regulator, the activities of the Pensions Ombudsman and part of the activities of the Money and Pensions Service.

All these bodies have seen a significant increase in their duties in recent years, driven by changes in and a desire by Government to strengthen the regulatory landscape, along with increased demand for services provided by these bodies. Unless action is taken the cumulative deficit of some £50m in 2020 is predicted to grow to nearly £200m by 2023 and go on to reach £540m by the end of 2029/30.

Four options are put forward to finance this looming black hole:

• An increase of 10% on 1 April 2020, and further increases from April 2021 informed by a wider review of the levy
• A phased increase in the levy over three years commencing 1 April 2020 – but this would see a scheme currently paying £10,000 pa being required to pay £34,500 pa by 2022/23, a staggering rise of 245%
• A phased increase in the levy over approximately ten years commencing 1 April 2020 – this would see the scheme currently paying £10,000 pa being asked to pay £28,500 pa by 2028/29; and
• A phased increase in the levy over approximately ten years commencing 1 April 2022 – so no change in 2020/21 for the scheme currently paying £10,000 pa, but thereafter the levy would increase, rising to £30,500 in 2028/29

The Government is attracted to the first option, which is a holding operation, allowing it more time to consider longer-term options for changing the levy’s structure and to understand more fully what impacts pension providers and scheme members could be required to bear.

In addition, the Government proposes a one-off increase for schemes that have between 2-11 members (as the rates for these “Band 1” schemes have remained unchanged since 2000). Occupational schemes would see their current £29 pa rise to £75 pa, whilst personal pension schemes would see their current £12 pa rise to £30 pa.

Consultation ends on 15 November with the DWP needing to lay regulations by the early New Year.

Comment

What a shock, but at least for now it looks as if it will be a 10% increase across the board for schemes other than those in Band 1. However, the amount being raised by the levy has clearly got well out of line with what is needed, so there must be serious discussion between Government and stakeholders as to whether schemes and providers should continue to finance all the core activities of these bodies before the Government determines a long-term path for the levy.

More to come on climate change and green finance

On 16 October the Financial Conduct Authority announced, via a feedback statement on its climate change and green finance discussion paper published last October (see Pensions Bulletin 2018/41), that there are a number of regulatory developments in the pipeline. These include the following:

• A feedback statement on the separate FCA/Financial Reporting Council discussion paper (see Pensions Bulletin 2019/05), setting out some actions to help address the most significant barriers to effective stewardship, is expected in the next few weeks
• The rules for independent governance committees, requiring them to oversee and report on firms’ environmental, social and governance (ESG) and stewardship policies (see Pensions Bulletin 2019/15), will be finalised by the end of 2019
• Measures to facilitate investment in patient capital (see Pensions Bulletin 2018/51) will be finalised in due course
• There will be an FCA consultation in early 2020 on new rules (likely to be comply or explain, at least initially) to require certain issuers of listed securities to make TCFD-aligned climate change disclosures, alongside clarification of existing disclosure rules
• New FCA rules to improve climate-related disclosures by regulated firms such as insurers and investment managers will be considered. Proportionality was a frequent concern from the consultation, so it will be interesting to see if the FCA restricts the rules to larger firms or certain types of firms
• There is likely to be increased supervisory attention and further policy analysis relating to ‘greenwashing’ of financial products (ie where products are misleadingly marketed as producing positive environmental outcomes). Although this is probably more focused on the retail market, it may also affect marketing information relevant to institutional investors
• The FCA will undertake some factfinding to inform its next steps regarding the transparency of the methodologies of ESG data providers (eg for producing the ESG metrics used in the construction of ESG indices)

The feedback statement also contains frequent references to collaboration with other parties and the need to take account of other UK, EU and international initiatives – for example, the FCA is working with the Prudential Regulation Authority and industry as part of the Climate Financial Risk Forum which was established in early 2019 to develop practical tools and approaches to address climate-related financial risks and will continue to contribute to the Fair and Effective Markets Review (FEMR) to understand the potential or actual barriers to the growth and effectiveness of green finance.

Comment

The focus on ESG issues in the pensions sphere continues to grow – and, with this Feedback Statement, the FCA aims to highlight how its work will help support the response to the climate challenge and the development of the green finance market.

PLSA sets out income required for three levels of retirement living

On 17 October the Pensions and Lifetime Savings Association launched its retirement living standards, whose purpose is to help people in the UK appreciate the income they will need in retirement in order to lead a certain lifestyle.

• The minimum living standard (“covers all your needs, with some left over for fun”) requires an income of £10,200 pa for a single person and £15,700 pa for a couple
• The moderate living standard (“more financial security and flexibility”) requires an income of £20,200 and £29,100 pa for a single person and a couple respectively
• The comfortable living standard (“more financial freedom and some luxuries”) requires an income of £33,000 pa for singles and £47,500 pa for couples

Further details are provided by the PLSA via a series of graphics here. These also make clear that higher amounts are required if living in London.

The three levels of living standards are based on a basket of goods and services, from household bills, food and drink to holidays and helping others. Developed from independent research undertaken by Loughborough University, the PLSA first suggested these in a consultation in 2017 (see Pensions Bulletin 2017/43).

The PLSA will now seek to ensure that these standards are adopted by Government and the pensions sector in various member communications and tools in order to help people plan more effectively for their retirement income in later life.

Comment

These standards are a useful re-expression of savings goals that many people are likely to understand. The PLSA hopes that they will become widespread and provide a spur for additional savings out of which retirement income can be financed. However, it is important to note that whilst a very useful introduction to what income may be needed by many people to live a certain lifestyle, everyone’s circumstances will be different, especially when it comes to providing for others.

Divorce, Dissolution and Separation Bill is back

The Bill which makes important changes to the legal process for married couples to obtain a divorce, for civil partners to dissolve their civil partnership, or for obtaining a judicial separation (see Pensions Bulletin 2019/24) has been carried forward from the previous Parliamentary session. This Bill, which was at report stage in the House of Commons before September’s faulty prorogation, also updates the terminology used and makes some consequential changes to the pension sharing legislation.

Comment

One of the side effects of this modernisation of the divorce laws is that pension schemes may experience an increase in requests for divorce information and transfer calculations. Schemes will also need to review scheme documentation and member communications to reflect new terminology.

Termination awards – HMRC consults on regulations

On 16 October HMRC launched a consultation on the necessary regulations to activate the requirement for employers to report and pay Class 1A national insurance contributions on termination awards to the extent that they are above £30,000. The regulations also cover the payment of NICs on sporting testimonials to the extent that they are above £100,000.

The legislation is intended to take effect from 6 April 2020 and follows the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 which brings such payments within the NIC net, providing consistency of treatment of such payments with income tax (see Pensions Bulletin 2019/30).

As with the settling of income tax on such payments the intention is that real time reporting will be used to settle the NICs falling due.

Comment

Individuals sometimes want to use taxable termination payments to make contributions to their pension scheme. Once the changes above are in place it might be attractive to arrange this by way of sacrifice for an employer pension contribution because of the consequent employer NI saving.

However, termination payment situations should be handled with extreme care, having regard to the many complexities of the pensions tax annual allowance.

Pensions Regulator updates its employer debt guidance

On 18 October the Pensions Regulator updated its employer debt guidance first issued in July 2012.

This first update was promised in February 2018 when the DWP settled regulations introducing the “deferred debt arrangement” – a further option for addressing employer debts, which may be of interest to employers withdrawing from non-associated multi-employer schemes (see Pensions Bulletin 2018/09).

Comment

Whilst the update usefully describes the new deferred debt arrangement for managing employer debts, unlike most of the other options which for example include a “key considerations” section, it does little more than re-express the legislation in plain English.